Another Earnings Season, Another Flat to Down Market?

Stock market during earnings seasonThe stock market has been essentially flat since 2011 trading got underway, and if recent history is any guide it won't do much during fourth-quarter earnings season, either.

Dow component and aluminum giant Alcoa (AA) unofficially kicked off the reporting period late Monday with another mixed release (earnings came in above Wall Street's forecast but sales fell short), and stocks posted muted gains the following session.

Partly that's due to a V-shaped recovery in corporate earnings based on wider operating margins (also known as cost cuts) rather than any rebound in revenue. Pretty soon the old saying "you can't cut your way to growth" will catch up with companies' bottom lines.

"While companies have been producing strong double-digit earnings gains on the back of single-digit revenue growth coupled with significant cost reductions over recent quarters, further gains are limited," Jeffrey Kleintop, chief market strategist at LPL Financial, writes in his latest report to clients. "There is little room to squeeze out additional expenses in 2011 particularly given that costs associated with materials, energy, and expanding workforces are rising."

On Pace for Record Earnings Per Share

The good news is that the S&P 500 ($INX) may set a record this season for notching the highest fourth-quarter earnings per share in history. Indeed, if the numbers come in as expected, the current earnings season may be among the top three of all time, Kleintop notes, trailing only the first and second quarters of 2007. The bad news is that having climbed back to near their prior peak, earnings growth is beginning to slow, Kleintop says.

"We except closer-to-normal EPS growth of 10% in 2011 after 2010 resulted in a strong 39% gain over 2009," the strategist writes. "Our outlook for 2011 corporate profits is bound, in part, by continued sluggish revenue growth resulting from modest economic expansion in the developed markets, including the United States."

Perhaps that explains why the market has been such a dog during the last four earnings reporting seasons. The S&P 500 gained about 13% last year, but it didn't get much help while companies were releasing results. The broader market was actually unchanged or lower for all four of 2010's earnings season, Kleintop notes. See the chart below, courtesy of LPL Financial.

The mid-January through mid-February season coincided with a peak-to-trough drop of 7%, Kleintop notes, while the mid-April to mid-May period coincided with a decline of about 10%. The mid-July to mid-August season saw a slight decline, and the mid-October to mid-November season notched a slight gain.

"It is important to keep in mind that the companies that report early in the season are most often not the bellwethers they are commonly thought to be," Kleintop says. "We will not really know how results are shaping up until just after the end of the month when about half of the S&P 500 companies will have reported."

Still, given the fundamentals and the technicals (bullish sentiment and overbought market conditions), the current reporting season could once again coincide with a flat-to-down market. So what's an individual investor to do?

"Use any weakness as a buying opportunity," Kleintop suggests, "which may be capable of enhancing the modest single-digit gains we envision for the year as a whole."

Increase your money and finance knowledge from home

Introduction to Economic Indicators

Measure the performance of the economy.

View Course »

Managing your Portfolio

Keeping your portfolio and financial life fit!

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:
Robert & Lisa

Dan is probably one of those writers whose salary is paid in part by George Soros who is offering reporters and news writers large amounts of money to report and write the way he wants them to... Distortion and deceit is their montra. Just look at one of their own, Nancy Pelosi saying the last congress was pay as you go. Why is it, when the Demons get control, the poverty rate and unemployment rate goes up? Somebody is telling you poor people lies. Shouldn't you do something like say, vote the evil, ultra rich puppet Demoncrats out?

January 11 2011 at 11:19 PM Report abuse +5 rate up rate down Reply

In other words, Dan, we are fast approaching our new "normal" if we are not there already. This is it. We have stabilized. Why do I think there is more recession, or at best, another coming, in light of China becoming Number Two, and several countries in EU having no place but up to go. Not until our unemployment goes back to 6 percent will I have faith in anything financial in this country. Our work ethic has been demoralized to the point of corruption. Our government and Fed is between a rock and hard place, and movement is non-existent. We are definitely in the Winter of Our Discontent.

January 11 2011 at 9:18 PM Report abuse +4 rate up rate down Reply
Robert & Lisa

The markets are rigged by the evil, ultra rich Socialist Demoncrat backers like George Soros. He and his cohorts want to get all of the wealth for themselves through Social Justice or if you will, Socialism. Want to see our future. Socialist Mexico which boasts of the richest man in world, the largest silver producer, and plenty of oil yet the average Mexican makes less than 6 dollars a day with drug wars and corruption rampant. This is our future unless we plug the border and enforce our laws.

January 11 2011 at 4:28 PM Report abuse +8 rate up rate down Reply
2 replies to Robert & Lisa's comment

You're joking about the 'Soclialist Democrats' right? It never fails to amaze me when some people want to blame Bush and the Republicans, or Obama and the Democrates for this economy. Somewhere lost in some people's minds is the corruption on Wall St. that turned this economy unside down.
AIG, Goldman Sacks, Lehman Brothers, Freddie Mae and Fanny Mac, to name a few....executives and CEO's of Wall St. bailouts took record bonus's and raises.
Unemployment? How do you prevent the outsourcing of jobs that has been going one for the last 2 decades? A political party? Good lord.

January 12 2011 at 2:33 AM Report abuse -2 rate up rate down Reply
Robert & Lisa

bdyftns: The law makers are the ones who make the laws that either allow people the freedoms and the ability to prosper or restrain people. If there is something wrong on Wall Street or Main Street it is because the government is not doing it's job properly. Maybe corruption from lobbyists or just stupidity but is anyone arguing that our lawmakers are doing a good job? And the evil, ultra rich men's puppets are putting us deeper in debt by four times as fast as what the Republicans did. We have a tax cheat as Secretary of the Treasury, a President who lies about almost everything from when he'd close GITMO to not allowing any lobbyists in his administration to bribing Demoncrats to get his Obamacare passed. Yes, the Bush republicans did a poor job, but the Demons have done even far worse. The more new faces we get in 2012, the better off we'll be although there are a few, very few that deserve to stay. But I know of no Demoncrats who deserve to stay. The Democrat Party has obviously been taken over by the evil, ultra rich socialist elite.

January 12 2011 at 6:14 AM Report abuse +4 rate up rate down Reply